If you are working and contributing to a 401(k), we will look at some ways to improve your position within your plan. If you have ever looked at your plan in terms of selection of funds to invest in or the fees that the plan charges you are ahead of most. And if you have worked and contributed to more than one plan in your career you may have noticed that they most likely were quite different. When looking into your plans you may wish have the assistance of a Registered Financial Consultant. Do not let your 401(k) plan become a dusty fixture in your house, every now and then make sure you dust it off and take a close look at what it is doing for you.
Always Pay Yourself and Do Not Forget the Raises
Unless you are one of the lucky ones that work for a company or government entity that still offers a pension the 401(k) will be the main source of your retirement. And even if you will have a pension make sure you pay yourself first in a 401(k) or similar workplace retirement plan. This way, you can take some control of your retirement and hopefully have a nice nest egg when you reach your full retirement age. Otherwise, you will be relying on Social Security, and that may or may not look the way it does today. But that is another topic we will examine at some point.
As I have talked about on numerous occasions, always pay yourself first and foremost when it comes to your retirement savings plans. And if your company offers a match of some sort, always contribute up to that match to get that “free” money which provides you an instant return on your money. And do not just start at a percentage and never adjust it. When you get a raise, also increase your 401(k) contributions to give your retirement a raise as well. Most people set up a percentage and never adjust it during their careers. When you get your annual raise increase your contributions as well. That way you will not even notice that you got a raise in your paycheck, and at the same time you will be setting yourself up for a much better retirement.
Fees Can Destroy Your Returns
While you do not have a lot of control over the funds offered in your plan or the fees they charge, you need to be aware of them none-the-less. And if your plan does lack good performing funds research other options and approach your employer about the possibility of changing them for better funds. But as a rule it is a combination of poor performing funds and excessive fees associated with these funds that really hurts your returns. Management and administrative fees are a normal part of all funds, but these fees are not equal among funds or fund families. And in particular be on the lookout for 12B1 fees in your funds. What is a 12B1 fee? It is basically a commission to a third party for selling the fund to your employer’s retirement plan. Definitely a fee that can and should be avoided if possible.
If you research your plan’s funds and see that they are performing poorly or have excessive fees approach your employer about switching administrative companies for the plan. In recent years there has been a movement of employees requesting better plans and holding employers as more of a fiduciary as compared to just offering a retirement plan.
Cut Poor Performing Funds
While your employer is the one who selects the administrative company of the plan and in turn, they will select the funds that are available for investment with management’s input. But the company administering the plan does not have you, the employee’s, best interest at heart. They are in this for their own profit, not your retirement success. Employers are starting to be held accountable for these selections of plan administrators and are beginning to select better plan administrators. So, if your plan offers poor performing funds and management will not consider adding better funds or changing plan administrators contribute up to your company’s match. Then invest the rest in an Individual Retirement Account or IRA. Then if you contribute the full amount to that and still wish to invest you can switch back to the 401(k) retirement plan or invest in a taxable brokerage account.
The End Goal
As you are aware, the end goal of saving in a retirement account is to accumulate as much as you can for your golden years. Everyone wants to retire a millionaire, and it is possible. If you start saving $500 a month in your mid 20’s and earn a modest 7% you will indeed retire with more than a million in your account. And if you increase the $500 a month by giving yourself the raise you deserve you will end with well north of a million dollars.
If you follow these fairly simple tips, you can take control of your 401(k). And if you need help seek out the assistance of a Registered Financial Consultant. And as always, if you have any questions please send me a message or leave a comment here.
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